Outflows from Binance totaled more than $1 billion in the past 24 hours, excluding bitcoin, according to data from blockchain analytics firm Nansen, after founder and CEO Changpeng Zhao resigned and pleaded guilty on Tuesday in a settlement with the Ministry of Justice.
Meanwhile, liquidity fell 25% over the same period as market makers exit positions, according to data provider Kaiko.
The outflows are significant and parallel what happened earlier when the exchange and its founder were charged with 13 securities violations by the Securities and Exchange Commission.
The exchange’s native token, BNB, has fallen more than 8% in the past 24 hours. Binance holds about $2.8 billion worth of BNB tokens, according to Nansen. And in March, after Binance phased out zero-fee trading for crypto-asset pairs including bitcoin, a key incentive for clients, the exchange began to see its share of all spot trades decline.
Binance remains the world’s largest crypto exchange globally, processing billions of dollars in trading volume each year.
Binance has agreed to pay $4.3 billion in fines to the US government. The plea agreements end a years-long investigation into the crypto exchange.
More than $65 billion in assets remain on the platform, according to Nansen, meaning Binance is likely to be capitalized enough to withstand a sudden investor rush away from the platform. And while withdrawals are increasing, there has not yet been a “mass exodus” of funds from the stock market.
“After the momentary shock of the agreement with the announcement, there is no significant impact on most assets,” said Grzegorz Drozdz, market analyst at investment firm Conotoxia Ltd.
“The cryptocurrency that seems to have suffered the most, losing over 9%, is the BNB token from Binance. Out of the top 100 cryptocurrencies, as many as 98 have made a remarkable recovery in the last 24 hours. Bitcoin, meanwhile, fell 4% before recovering to remain with a 1.3% loss,” he said.
Drozdz added that it may be a net positive for the industry now that the row with regulators is behind Binance and that the company has pledged to increase security measures.
“This, combined with the possible impending approval of an ETF based on bitcoin prices, could positively affect the crypto market in the long term,” said Drozdz.
Can Binance Survive At This Stage?
That’s the multibillion-dollar question facing the cryptocurrency giant after Zhao agreed to a plea deal and left the company.
Started by the Chinese-born entrepreneur in 2017, Binance went from a relatively obscure name to a major force in crypto in a matter of weeks.
CNBC experts said that Binance is likely to pass the test despite the turbulent situation. They cited the company’s decision to comply with the DOJ process and implement a three-year strategy to bring its operations into compliance, as well as the amount of assets held in the company’s reserves.
“The $4 billion figure is clearly very large and will create real pain on Binance’s balance sheet,” Yesha Yadav, the Milton R. Underwood Professor of Law and Associate Dean at Vanderbilt University, told CNBC via email.
“However, this fine does not appear to be intended to deal a fatal blow to the exchange. Based on Binance’s dominant position in the crypto ecosystem for a number of years, CZ’s personal wealth… and continued trading volume despite the decline in overall cryptocurrency trading volume as well as Binance’s market share relative to other venues, I doubt Binance will face solvency risks in paying this fine.”
$4.3 billion plea deal
Zhao and others were charged with violating the Bank Secrecy Act by failing to implement an effective anti-money laundering program and with willful violation of US economic sanctions “in a deliberate and calculated attempt to take advantage of the US market without the implementation of controls required by US law,” according to the Justice Department.
Binance agreed to forfeit $2.5 billion to the government and pay a fine of $1.8 billion, for a total of $4.3 billion.
US Attorney General Merrick Garland said at a news conference on Tuesday that it is “one of the largest sentences we have ever received”.
“Using new technology to break the law does not make you a troublemaker. It makes you a criminal,” Garland said. “Binance has prioritized its profits over the safety of the American people.”
Zhao said Tuesday in a post on X, formerly Twitter, that he “made mistakes” and “must take responsibility.”
Richard Teng, a former Abu Dhabi financial services regulator, has been named as Zhao’s replacement. Teng was most recently the global head of regional markets at Binance.
He was also previously director of corporate finance at the Monetary Authority of Singapore.
The action against Binance and its founder was a joint effort by the Department of Justice, the Commodity Futures Trading Commission and the Treasury Department.
The Capital Market Commission was notably absent.
Treasury Secretary Janet Yellen said Tuesday that the exchange allowed illegal entities to make more than 100,000 trades that supported activities such as terrorism and illegal drugs, and that it allowed more than 1.5 million virtual currency trades that violated US sanctions.
It also allowed transactions related to terrorist groups such as Hamas’ Al-Qassam Brigades, Palestinian Islamic Jihad, al-Qaeda and ISIS, Yellen said in the announcement, noting that Binance “has never filed a single suspicious activity report.” .
Zhao was released on $175 million personal recognizance bail with a $15 million cash bond, and a sentencing hearing is scheduled for Feb. 23.
Binance to continue
Binance will continue to operate but with new ground rules. The company is required to maintain and strengthen its compliance program to ensure that its business is in compliance with US anti-money laundering standards. The company is required to appoint an independent compliance monitor.
The case against Binance, which was unsealed on Tuesday, shows that three criminal charges were brought against the exchange, including operating an unlicensed money transfer business, violating the International Emergency Economic Powers Act and conspiracy.
Some of its rivals may want to take advantage of the situation, particularly Coinbase, Kraken and OKX.
Coinbase and Kraken are currently fighting their own legal battles with the SEC. In June, the agency hit Coinbase with a lawsuit similar to the one it brought against Binance, alleging that it operates as an unauthorized securities exchange, broker and clearing agency. And on Monday, the SEC sued Kraken, alleging that the exchange commingled $33 billion in customer crypto assets with its own company assets, creating the potential for significant risk of loss for its users.
Vanderbilt’s Yadav said Binance’s reserves are likely to come under scrutiny as investors evaluate where to go after the company’s CEO leaves. Binance’s efforts to create strategic transparency after the FTX collapse have “backfired,” he added.
Binance has published its Proof of Reserves, a system that shows the number of its assets and liabilities. But this proof is based on limited information that can be revealed by public blockchains and is not on the same level as a full audit.
“There is no doubt that Binance reserves will come under scrutiny in the coming months and years,” explained Yadav. “A big question hanging over Binance is how it operates, the state of its internal governance and risk management.”
“This is a space long known for its opacity as well as an impenetrable capital and organizational structure, the complexity of which has led regulators like the CFTC to investigate these organizational connections as potential avenues for Binance to participate in activities that violate existing regulations,” Yadav said.